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hhgregg Struggles with Weak Consumer Electronics Business

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On Aug 28, 2014, we issued an updated research report on hhgregg, Inc. (HGG - Analyst Report). This appliance and electronics retailer reported weak results for first quarter fiscal 2015 on Jul 31, mainly due to a decline in the consumer electronic category.

hhgregg reported a loss of 36 cents per share, which was wider than the prior year loss of 4 cents and the Zacks Consensus Estimate of a loss of 16 cents. The loss was primarily due to double-digit drop in comps, higher advertising expenses and higher SG&A costs.

hhgregg’s net sales declined 10% and also lagged the Zacks Consensus Estimate due to weak comps. Comps decreased in double-digits in the quarter due to weakness in all product categories, which include consumer electronics, computing and wireless, appliances and home products categories. In fact, comps of the appliances category declined for the first time, after increasing in the past 11 quarters. Comp sales in the appliance category declined 2% in the current quarter due to a decrease in units sold and a slight drop in average selling price.

hhgregg has been delivering disappointing results in the consumer electronic category for more than a year due to declining industry demand. Weak promotional activities are also hurting the sales. In addition, lack of innovation in televisions has been severely impacting overall store traffic. Though the company witnessed growth in large screen sizes and improved mix of Ultra HD in the first quarter of fiscal 2015, which led to gross margin expansion within the category, we continue to expect weakness in the video industry over the near term.

Besides consumer electronics, the company is also witnessing sluggishness in same store sales in the computing and wireless category. Weak comps were due to a decrease in demand for laptops and lower average selling price for tablets. Category comps were also negatively impacted due to the underperforming contract-based mobile phone business, which the company exited during the fourth quarter of fiscal 2014.

The company’s home products category also started showing signs of weakness during the third quarter of fiscal 2014, which continued in the recently reported first quarter fiscal 2015.

The company is therefore employing different initiatives to revive its business such as product innovation, shifting focus from one furniture brand to five brands (to revive its home products category) and even exiting the underperforming businesses. However, we still continue to expect weakness in these categories over the near term.

Moreover, hhgregg did not provide a guidance for fiscal 2015 as the company is experiencing continued volatility in the consumer electronics industry. hhgregg holds a Zacks Rank #3 (Hold).

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